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[Full Transcript] Bridgewater Associates’ Ray Dalio Speaks With CNBC

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CNBC Transcript: Bridgewater Associates’ Ray Dalio Speaks with CNBC’s Andrew Ross Sorkin Right now

WHEN: Immediately, Thursday, November 15, 2018

WHERE: CNBC’s “Squawk Box”

The next is the unofficial transcript of a CNBC interview with Bridgewater Associates‘ Ray Dalio

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ANDREW ROSS SORKIN: Welcome again to “Squawk Box” this morning. Take a fast take a look at futures. We’re now within the pink this morning. The Dow appears like it might open off about 20 factors. Nasdaq can be as much as – simply marginally about 2.5 factors and S&P 500 off by four factors. Issues have swung round. We need to get proper now to our first “Squawk Box” newsmaker of the hour, becoming a member of us from the Greenwich Financial Discussion board: Ray Dalio is right here, founding father of hedge fund Bridgewater Associates. Good morning, ray, thanks for becoming a member of us.

RAY DALIO: Good morning and welcome to Greenwich, Connecticut.

SORKIN: Thanks for that. We need to get your sense of the place we’re in what looks like a really difficult market lately. We have now a variety of volatility. We’ve questions on tariffs and commerce, in fact and rates of interest. You’ve all the time put the markets within the context of the financial machine. So the place are we inside that machine?

DALIO: Nicely, you realize, there’s the short-term debt cycle, long-term debt cycle and productiveness. We’re within the late levels, perhaps the seventh, the eighth inning of the enterprise cycle, proper? We’re within the a part of the cycle the place there’s been lots of financial easing. Central banks purchased $15 trillion value of belongings, pushed them up so much. We had the good thing about a company tax minimize, all of that stimulation, and consequently, we’re within the late a part of cycle the place there’s a tightening of financial coverage. And you recognize, so it’s sort of the late a part of the cycle with belongings absolutely priced. And when it comes to the longer-term debt cycle, we’re at some extent the place rates of interest are comparatively low, the capability of central banks to ease financial coverage is restricted, United States is restricted, and different counties it’s restricted. In order that’s the place we ar. We’re able additionally the place we have now the rising energy China competing with america, a longtime energy, as an efficient energy competitor. That’s very very similar to the late 1930s. In order that’s the place I feel we’re.

SORKIN: Let me simply return a second. The 1930s are a sophisticated time. However particularly, on the difficulty of the fed and rates of interest when it comes to the place we’re within the cycle, there’s a debate, as you already know, about whether or not rates of interest ought to get hiked and the way robust the financial system actually is or isn’t. What do you assume?

DALIO: Proper now, the Fed expects to boost it another time this yr. And doubtless three – two or 3 times subsequent yr. I feel there’s an issue when it comes to asset costs. I feel that price of improve wouldn’t have the ability to be made as a result of we’ve raised rates of interest to a degree the place it’s hurting asset costs. We now have now, a flat yield curve. We’ve — in different phrases, the — now you can get in a two to five-year word, you will get about three%. And you haven’t any worth, no materials worth danger. So, we’re in a state of affairs proper now that the Fed, I feel, should take a look at asset costs earlier than they take a look at financial exercise. It’s a troublesome place as a result of that stimulation that they’ve, within the type of these tax cuts, is an enormous stimulation into the capability limitations as we have now low slack. In order that the financial system itself will strain them to boost charges. I feel in all probability an excessive amount of. I feel we’ve got a provide/demand drawback for bonds that may notably come subsequent yr and the yr after. In different phrases, due to that tax minimize and the deficits, we’ll should promote much more bonds and United States itself can’t take in that amount of bonds. So we’re going to should promote these bonds to buyers in different nations. You take a look at the portfolio of these, they usually have a variety of these which might be kind of obese in that bond. So I feel there’s a provide/demand imbalance and a troublesome place for the Federal Reserve. It’s a dangerous state of affairs.

SORKIN: Simply to place a nice level on it although, it sounds such as you’re recommending should you’re Jay Powell, you may decelerate, equally to what the President instructed?

DALIO: Sure. I might take a look at what’s discounted within the curve. And understand that that’s discounted in all asset costs. It’s discounted in bonds. It’s discounted in equities. It’s discounted in actual property equities, personal equities — that price of change in there. And I might hold it definitely not quicker than that, and I might in all probability hold it in all probability lower than that. I feel the — you realize, the dangers of uneven on the draw back, as a result of if we have now somewhat bit overshoot within the inflation price, you’re going to be able the place it’s not going to be an issue. Who cares when you have 2.5% or one thing, it’s not going to run uncontrolled. However if in case you have a downturn, first in asset costs after which you have got a downturn within the financial system, it’s an uneven danger. It’s a critical danger. We’ve an financial polarity in populism which is a matter. When you have a downturn, I feel the battle goes to be larger, I feel that’s an enormous problem. And I feel additionally, the instruments aren’t as efficient on the draw back, so I might err on the aspect of simpler financial coverage — on the curve.

SORKIN: Let me ask you a query: should you’re involved about asset costs, certainly one of your friends, Dan Loeb lately simply wrote, “we have delevered our portfolio, reduced our tech exposure meaningfully and grown our short book. We expect to be net sellers over the next few months if markets rally.” As an investor on the market proper now, how cautious are you?

DALIO: Nicely, as I stated I feel we’re within the — we’ve gotten a variety of the excellent news behind us and I feel belongings are absolutely priced and I feel there’s uneven danger. Like I stated, I gained’t speak about our positions, however I feel — I feel the upside place is just not as robust and relative to the danger.

JOE KERNEN: Ray, that made by no means made a lot sense to me, however you stated we’ve the instruments to deal with a downturn. Some individuals assume we have to increase charges to get to some extent the place we will reduce them if we have to reduce them. Does that make any sense to you — ?

DALIO: That feels like fairly dangerous logic to me.

KERNEN: You realize what they’re saying. In case you’re up there at six, you’ll be able to maintain chopping. However if you’re all the best way down close to zero, you don’t have plenty of cuts that you could make in case there’s a downturn. However —

DALIO: Yeah, however –

KERNEN: — to go all the best way down is loopy.

DALIO: Yeah, however look — I’m telling you what’s constructed into the curve, what’s constructed into all the markets is the prevailing rates of interest.

KERNEN: Proper.

DALIO: So that you increase that method if that’s not good. I feel the Federal Reserve ought to use extra macro prudential insurance policies. In different phrases, there are elements proper now, there are some bubbles rising. However macro prudential insurance policies, what meaning, if there’s a regulatory authority that may cope with sure bubbles as they’re rising to be extra focused, than utilizing rates of interest as an entire.

SORKIN: And, Ray, speaking about bubbles, do you are worried about high-yield bonds? We have been having a dialog earlier as we speak truly about Basic Electrical, a Connecticut-based firm whose debt has come beneath a whole lot of strain of late.

KERNEN: Boston based mostly.

SORKIN: Now Boston based mostly, yeah.

DALIO: the — lots of the high-yield debt market has gone into leveraged loans and CLO. And so, in consequence, it’s off stability sheet — I imply, it’s personal. And there are elements of that market greater than the actual excessive yield debt market; though if I used to be to take double “b,” some triple “b” forms of debt, I feel that it’s greater than absolutely priced.

BECKY QUICK: However, Ray, I’m questioning when you can shed a bit of mild on what may occur to the junk market if GE heads in the direction of junk standing. I imply, it’s type of buying and selling there based mostly on the credit score default swaps at this level. It’s headed that course. If that have been to occur, you’re speaking about ge turning into 10% of a $1.2 trillion market. And that looks like an terrible lot to soak up. What sort of aftershocks would that probably have?

DALIO: BECAUSE — I feel GE’s issues are nicely acknowledged out there.

QUICK: Proper.

DALIO: And doubtless reflecting these. As a result of there’s plenty of index funds or ETFs the place the investor experiencing a sting seems at that asset as a lot of belongings, you can have extra contagion to the opposite markets, as they are saying I don’t need that type of fund after which even much less stress funds would expertise some kind of contagion. So, yeah, there’s that type of danger.

SORKIN: Ray, I needed to ask you about China. I do know you simply introduced a brand new fund that’s truly going to be based mostly in China and also you’ve spent a number of time there. Clearly we’re in the midst of what some have already referred to as a commerce conflict, given the tariffs. Simply converse to what you consider the potential commerce struggle and the way you assume it’ll finally shake out.

DALIO: I feel — the commerce struggle I feel could be labored out, commerce balances I feel from a Chinese language perspective, American perspective. Nevertheless it goes method past the commerce warfare, you realize? There’s this now competitors, actual competitors, for — on the earth, in supremacy. That is the primary time because the ’30s that we’ve had an rising nation that may be a comparable energy, actually, to the USA. And there are points there. So, these points should do with property rights, they need to do with entry competitors, they’ve — they’re geopolitical. There are a selection of issues. I feel that the commerce points can truthfully be handled. However it’s, you realize, it’s a broader challenge that will probably be with us for a very long time. And I feel what most basically it has to do is a unique way of living. A unique strategy to how they assume governments ought to work. As one of many Chinese language leaders described, it’s principally a top-down, versus a bottom-up sort of strategy, you already know. For those who have been to take a look at let’s say gaming, by means of instance, enjoying video games, video video games and also you go in China, they may have a viewpoint as to what their youngsters ought to watch on video video games. That exemplifies this. So they’ll management — it could actually’t be a specific amount of hours and it may possibly’t be some of these video games and so forth. And so that may be a top-down choice. In america, we might not need the federal government – the system is a bottom-up. So, it actually goes again to Confucius, in 500 B.C., it’s a really totally different strategy. And that’s — so, once you take a look at the 2025 plan in China, the federal government believes that they need to have a plan for making China nice. They usually work that plan. After which they’ll have coordination between the elements. So, sure, the army will cooperate with the tech corporations and so forth. That sort of exercise is objectionable to america as a result of that’s seen as one thing that’s totally different. So, that sort of id difficulty, or these varieties of rivalries, might be with us for a very long time, although the commerce challenge itself I feel may be handled.

SORKIN: Ray, earlier than we allow you to go, I need to speak about a maybe extra native difficulty than this international problem, which is the place you’re based mostly proper now. And the convention that you simply’re attending. And I do know there’s quite a lot of massive audio system, together with your self later at the moment. That is the Greenwich Financial Discussion board. However there’s an enormous query proper now about hedge funds and Connecticut. The state of Connecticut. Taxes in Connecticut. Whether or not it’s truly the best place for companies like yours to be based mostly, given the tax charges there. How are you fascinated with that, provided that a few of your friends have left the state?

DALIO: Nicely, you see what Greenwich, Connecticut is. I imply, it’s a wonderful city proper outdoors of New York Metropolis. Really easy entry to the town. Fabulous group. After which its vitality, it’s nice intellectually, it’s very stimulating. There’s a tradition right here that’s nice, group, all of these issues. After which there’s this concern of the state points. I feel that the state goes to strategy this in a really efficient method. We’ll see. You recognize, there’s a brand new authorities and so we’ll see how. However the strategy that even New York took, when it comes to Lengthy Island Metropolis and the bringing in, making a tax-free financial zone. For instance, you can take Bridgeport, and you possibly can take New Haven, and you possibly can take Hartford, Connecticut, and make these tax-free financial zones and usher in vitality to the state. I feel that it’s actually going to be a check of the cleverness. And it’s a problem that they’re going to need to cope with a method or one other. It might be very dangerous to the state. It’s a dangerous problem as a result of the polarity between the high-income areas and the opposite elements of the state, that are actually struggling, can’t be touched it’s a problem.

KERNEN: Earlier than you pull up states and transfer right down to zero revenue tax Florida with Tepper, you may watch for the recounts. Simply, I don’t know — wait a few weeks earlier than you determine.

SORKIN: He’s not deciding. He’s staying there.

KERNEN: No, I do know.

SORKIN: By the best way, what do you consider your friends which have moved to Florida?

KERNEN: The joke’s on them, perhaps.

DALIO: Nicely, I feel the tax situation is a matter of consideration and the worst case state of affairs is a nasty state of affairs for, not simply Connecticut, however a number of the Northeast — New Jersey is an effective instance, and New York, totally different elements. And i feel that mannequin needs to be division with by bringing in much more income, by creating, you already know, a special strategy. However I — it’s comprehensible. It’s not simply — it’s the entire space. Wherever you have got taxes. San Francisco is coping with the identical factor with — like Nevada. It’s a nationwide situation.

QUICK: Ray, we solely have a couple of seconds however in a short time, what you’re speaking about, creating these zones it coming underneath protest from individuals in New York Metropolis proper now.

DALIO: I’m sorry, I didn’t get that. Say it once more, please?

QUICK: Individuals are protesting the tax giveaways to those rich corporations, such as you talked about for Lengthy Island Metropolis.

DALIO: No, no, yeah, I’m saying, I feel in the event you take — I don’t assume you’ll be able to reduce taxes. You need to increase tax income.

SORKIN: Proper.

DALIO: The difficulty of elevating tax income is — it’s a lot the identical as if we’re taking a look at amazon going to Lengthy Island Metropolis.

SORKIN: Proper.

DALIO: Is that going to be a internet profit? Or is that not going to be a internet profit? And you bought to take a pointy pencil. For those who take a free financial zone, I’ve seen this occur in a whole lot of locations, and the influence of corporations who usually are not there coming right into a tax-free financial zone brings internet income. And we’d like internet income. As a result of you’ll be able to’t minimize bills. It’s not humane. And you may’t increase taxes. As a result of for those who increase taxes individuals are going to go away extra. So you need to have one thing like that.

SORKIN: Ray, we need to thanks. It’s a pleasure. It’s a must to get to a panel. We have now some breaking information to get to as nicely. We need to — we respect your time. Thanks as all the time. And we look ahead to seeing you once more very quickly. I feel in Davos, hopefully.

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